The Turkish president is getting desperate. Not only does he have a rival for the first time in many years after his party lost elections in Istanbul, but the Central Bank has been trying to operate independently, as it should--but Erdogan isn’t having that. On Saturday, Erdogan fired the country’s central bank governor, Murat Cetinkaya, over the same policy differences that have Trump threatening to replace the head of the US Federal Reserve, Jerome Powell.
Cetinkaya did not want to cut interest rates. Neither, it seems, does Powell.
That’s because central banks don’t take orders from presidents. They operate independently, until now.
The fallout is ominous on a number of levels.
Turkey’s economy slipped into recession earlier this year, and that hasn’t been good for Erdogan’s political prospects.
Last year, Cetinkaya had raised the benchmark interest rate by 750 basis points in order to support the lira. He hasn’t touched it since then, but also refused demands from Erdogan and his son-in-law, the finance minister, to cut rates. When they demanded his resignation, he refused, citing the bank’s independence. So they fired him.
Erdogan wants to control monetary policy, and his view of such contradicts what economic evidence has always showed us. The Turkish president strongly believes that inflation is caused by high interest rates. He also is convinced that interest rates are the work of the devil himself.
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Investors aren’t keen on pouring money into an economy that doesn’t have an independent central bank. Even worse from an investor confidence perspective is a country whose monetary policy will be controlled by an individual with a very loose grasp of economics that includes deities.
Turkey is drowning now in unemployment that has reached double digits, and inflation
Erdogan himself laid the foundations for a recession, and while inflation eased a bit in June, compared to May, inflation still increased by 15.72 percent year-on-year last month. Last October, it topped 25 percent.
The languishing lira, for its part, lost another 2.1 percent against the dollar on Monday, after markets had a chance to respond to the central bank firing in early Asian trade.
No one thinks this will end well--not least, for Erdogan himself.
After losing Istanbul, his power base is shaken to the core, and Erdogan has been unable to respond coherently.
On Monday, news emerged that a key ally in Erdogan’s ruling AK Party (AKP), former deputy prime minister Ali Babacan, resigned from the party over political differences and is planning to launch his own political movement. The message is clear that this is fallout from the central bank firing.
As Erdogan boldly marches to what could very well be his undoing, all eyes are on Trump and the U.S. Federal Reserve, within which a similar story is unfolding.
Late last month, Trump doubled down on criticism of Powell, telling Fox Business that he would be willing to replace the head of the central bank who was “sucking [money] like from a vacuum cleaner”. He suggested that he had “made” Powell, and could unmake him just as easily.
By Fred Dunkley for Safehaven.com
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